Bank of England Must `Hold Its Nerve' on Interest Rate, Ernst & Young Says

By Jennifer Ryan -
Jan 17, 2011

Ernst & Young LLP’s Item Club said
the Bank of England must “hold its nerve” and not raise its
key interest rate until the recovery shows signs of overcoming
the impact of the government’s budget squeeze.

“With inflation likely to reach 4 percent this spring, the
Monetary Policy Committee will come under intense pressure,”
the research group said in a report in London today. It should
“keep base rates where they are until it is clear that the
economy is taking the fiscal adjustment in its stride.”

The bank maintained emergency stimulus last week as it
weighed the threats of spending cuts against the risk that
higher oil prices and sales tax rate will keep inflation above
the government’s 3 percent limit. A senior lawmaker from the
ruling Conservative Party called yesterday for increases now,
and economists at banks including Citigroup Inc. said they may
come faster than previously anticipated.

Inflation may have accelerated to 3.4 percent in December
from 3.3 percent in November, according to the median forecast
of 31 economists in a Bloomberg News survey. That would be the
highest in seven months. The Office for National Statistics will
publish the data at 9:30 a.m. in London tomorrow.

In a sign of mounting price pressures, input-price
inflation accelerated to 12.5 percent in December from 9.2
percent, data last week showed.

Growth Forecasts

The Item Club, which uses the same forecasting model as the
U.K. Treasury, revised its prediction for economic growth this
year to 2.3 percent from 2.2 percent. It cut its 2012 projection
to 2.8 percent from 2.9 percent.

The group also said that exports and investment will be
“sufficiently strong” for the recovery to continue and that
inflation will slow.

Societe Generale SA, BNP Paribas SA and Citigroup this
month changed their forecasts for rate increases from a record
low of 0.5 percent. Citigroup says it sees two quarter-point
rate increases in 2011 instead of one, and the other banks say
the first move will come this year, not in 2012.

Michael Fallon, a Conservative member of the lawmaker panel
that scrutinizes the central bank and the Treasury, told BBC
Radio 5 yesterday that the policy makers should start a series
of “gradual” rate increases now to avoid sharper rises later.

“I tend to be a ‘now man’ because we’ve had constant
reassurances that inflation will fall and it hasn’t fallen,” he
said. “Given that rates are artificially low, they’re going to
have to go up anyway eventually, I’d rather see them start
moving up gradually than go up in a huge jump, perhaps in the
autumn.”

In a separate report today, Deloitte & Touche LLP chief
economic adviser Roger Bootle predicted U.K. GDP growth of 1.5
percent this year and next and said he sees no change in the
central bank rate until at least 2013.